(Bloomberg) — Apollo Global Management and Citadel, giants in the active investing world, are both pointing to the dangers that exist as passive funds gain prominence.
At Apollo, the view is that the hidden costs of passive investors include higher volatility and lower liquidity. Meanwhile, Ken Griffin's Citadel says regulators are underestimating the role of active managers and stifling their growth. US exchange-traded funds – a bastion of passive investing – have record net inflows of $913 billion this year, and combined assets surpassing $10 trillion, thanks to the strong US stock market.
or REPORT by Apollo managers Felix von Moltke and Torsten Slok focused on “higher asset price volatility, reduced liquidity and possible contribution to increased market concentration”.
For large-cap stocks in particular, the rise in passive investing — which is always on the long side — “makes it more unattractive and more risky to be short, which again means upward momentum in the stock price great,” von Moltke and Slok wrote. “When active investors become passive, large-cap stocks will benefit disproportionately.”
Passive investors account for more than half of assets in mutual and exchange-traded funds globally, they said.
Citadel's global head of government and regulatory policy, Stephen Berger, meanwhile, spoke on a panel at a conference hosted by the Federal Reserve Bank of Cleveland and the Office of Financial Research on Thursday. He said passive investing created financial stability risks, even though it provided “very positive” low-cost market access for many investors.
The success of passive management, he said, “is based on having active managers who are continuing to do the fundamental research to identify what is undervalued, what is overvalued, and then expressing these theses to the market in a way that maintains accurate prices, maintains efficiency. price, and therefore ensures that there is an optimal allocation of capital to the economy and to relative assets.”
In some cases, Berger said, oversight “is hurting the ability of a shrinking universe of active managers to continue to do the work they need to do,” Berger said. To the extent that happens, “I think we end up with much bigger system-wide challenges around valuations and capital allocation that could also pose a material risk to financial stability.”